Sunday, February 03, 2008

What to Expect When Equity Options Traders Are Bearish

The above chart shows how spikes in the 20-day equity put/call ratio have corresponded to intermediate-term market bottoms. When equity options traders are bearish, it's paid to look to the upside for short-term returns.

Going back to 2006 (N = 519 trading days), I note that we've had 85 days in which equity put volume has exceeded equity call volume. Five days later, SPY has averaged a gain of .33% (50 up, 35 down). That is considerably stronger than the average five-day gain of .03% (238 up, 196 down) for the remainder of the sample.

When the daily equity put/call ratio has been below .60 (N = 41), the next five days in SPY have averaged a loss of -.03% (20 up, 21 down).

All in all, when the daily equity put/call ratio has been above .80 (N = 262), the average five-day gain in SPY has been .23%. When the ratio has been below .80 (N = 257), the average five-day loss has been -.07%. This has been a useful sentiment measure. At present, the ratio is .76, a six-day low.

About Me

Author of The Psychology of Trading (Wiley, 2003), Enhancing Trader Performance (Wiley, 2006), The Daily Trading Coach (Wiley, 2009), Trading Psychology 2.0 (Wiley, 2015), and Radical Renewal (2019) with an interest in using historical patterns in markets to find a trading edge. As a performance coach for portfolio managers and traders at financial organizations, I am also interested in performance enhancement among traders, drawing upon research from expert performers in various fields. I took a leave from blogging starting May, 2010 due to my role at a global macro hedge fund. Blogging resumed in February, 2014, along with regular posting to Twitter and StockTwits (@steenbab). I teach brief therapy as Teaching Professor at SUNY Upstate in Syracuse, with a particular emphasis of solution-focused "therapies for the mentally well". Co-editor of The Art and Science of Brief Psychotherapies (American Psychiatric Press, 2018). I don't offer coaching for individual traders, but welcome questions and comments at steenbab at aol dot com.